Does Italy’s New Leadership Have ‘The Right Stuff’.

Maurizio Bragagni
Mar 29, 2018 · 3 min read
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The International Monetary Fund (IMF) last week warned Italy to reign in its pensions spending — describing it as ‘excessively high.’

An IMF report revealed that 16% of Italy’s GDP goes on pensions and it has the second highest debt-to-GDP ratio in the EU (133%) after Greece — and we all know what happened in Greece.

This is despite a 2011 law that changed state pension provisions and limited expenditure, which helped the world’s eighth-largest economy avoiding a crisis of similar proportions to that experienced by Greece and Portugal.

Since Italy’s electoral campaign, the 2011 ‘Fornero Law’ has been called into question.

Post-election the IMF was moved to step in and warn Italy to curb its over-spending on public finances, and in particular state pensions.

Of course it’s a very sensitive area.

In the fall out from the electoral muddle that sees Five-Star and far-right League (formerly the Northern League) parties with a hand on power, one wonders how Italy will find resolution.

Both parties more or less opposed fiscal consolidation policies. In the current climate the ‘Fornero Law’ looks likely to face the scrap heap.

Populist parties of the right and left with around half the votes have created a challenging environment for governance. One point to note however is that, after a 20-year stall in wage rises, average incomes in 2016 were higher than Ireland’s (Eurostat data). While the polarised parties can’t take the credit for a fortuitous and timely earnings boost, the trickle-down effect on the economy will make for a more settled voter community.

Until 1993, Italian governments lasted an average of 10.8 months (there were 52). The average since then has risen to over 21 months — so still short of two years*.

Public finances have also set records in terms of its fluctuating debt-to-GDP (gross domestic product) but, as a nation, Italian householders have a history of prudence with savings and debt.

The Italian economy’s 1950s golden age saw it among Europe’s star economic performers. For almost a quarter of a century Italy enjoyed healthy per capita economic growth from 1950–1973, on a par with West Germany and outstripping France and even the United States, according to calculations by Angus Maddison, the late renowned economic historian.

Post 1970 the parity with Germany was lost. The Italian jobless rate was at 3.2%, 7% in 1990, 10% in 2000 and 11% in January 2018 while Germany’s went from 0.5% in 1970, to 5% in 1990, 8% in 2000 and 3.6% in January 2018.

The number of Italians employed rose by 1.1 million since May 2014 — but 58% were temporary jobs.

Economists at the Banca D’Italia in a 2002 paper said: “For about 25 years, from the mid-sixties to the early nineties, Italy ran unsustainable fiscal policies. High deficits, stemming from persistent primary imbalances, fuelled public debt accumulation. In 1994 the debt reached 124% of GDP. Over the same period, future pension liabilities gradually increased to about 400% of GDP. Fiscal policy and rapid population ageing set public finances on an unsustainable path, with large generational imbalances and perspective deficits.”

So, here is a very simple question. Do we trust our newly elected leaders to work effectively together to a shared goal — and do they have the experience and the will to achieve it?

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